Believe It or Not, Your Next Smartphone Is Basically Free

Only two companies in the world earn profits from selling smartphones. The rest are working for you -- for free.

Costing $100 or more to buy, and then hundreds more to operate, your smartphone is something you might think is a pretty pricey gadget. But you'd be wrong. It's actually ... basically ... free.

At least depending on whom you buy it from.

iPhone5S. Source: Apple

Sure, at subsidized, sign-over-your-soul-to-AT&T-for-two-years contract rates, a new Apple(NASDAQ:AAPL) iPhone 5s will set you back $200 before the first monthly bill even comes due. Similar upfront charges apply for Samsung's GalaxyS4, the HTC One, and the BlackBerry(NASDAQ:BBRY) Q10. These are the prices you know about. But here's what you may not know: Most of the companies that manufacture these phones are losing money on their products.

Red ink by the gallon According to a recent research note out of investment banker Canaccord Genuity, there are really only two companies out there that have figured out how to make a profit from smartphones, tablets, and similar devices. Says the analyst: "Apple and Samsung combined to capture a remarkable 109% of Q3/13 handset industry profits."

But those two are the exceptions. As Canaccord reveals, BlackBerry, Nokia(NYSE:NOK), LG, HTC, and even Motorola, owned by Google(NASDAQ:GOOGL) -- they're all losing money at their phone businesses.

Our own number-crunching confirms these findings. According to data from S&P Capital IQ, Apple leads the pack of phonemakers with a 28.7% operating margin on its product portfolio. Samsung earns 16.5%, despite getting its Android operating system for free from Google. And it's all downhill from there:

What does it mean to you?Not to put too fine a point on it, what all this means is that no matter what you think you're paying for a smartphone, it's an incredible bargain. Two-thirds of the smartphone makers out there -- more, because we've really only looked at the biggies -- are working for you at a loss.

This means that even if you had what they have -- the ability to buy parts at scale; factories in Singapore, Taiwan, and China; hundreds of Ph.D. engineers at your beck and call; and patents, trademarks, copyrights, and industrial designs galore -- you still couldn't build yourself a smartphone any cheaper than they've already done for you. In effect, they're working for you, for free, to bring you the benefits of the latest communications wunder-gadgets.

This holiday season, as you're reviewing your shopping list and grumbling over the prices you'll be paying, it's worth keeping in mind: Some of the biggest corporations on the planet have already given you their Christmas presents: cheap, handheld communications technology -- provided gratis.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.
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